So a home owner or business owner stops paying the mortgage or making monthly interest payments - Did you know that you can buy the note from the bank at a discount even when the bank will not do a foreclosure or a short sale? Amazing, I know, but true. Even when a bank refuses to do a short sale a lot of banks have guidelines where they will sell you the note (mortgage paper) at a discount rather than the bank taking the risk of going through foreclosure.
What Is A Defaulted Note?
When you purchase a note from a bank that is foreclosing it is considered purchasing a “Defaulted Note”. This just means a note that is not paying.
When the bank sells the note to you as an investor at a discount the bank sells the note at a loss and can write off (for tax purposes) the difference from what they were owed versus what you paid.
Once you own the note you can work out your own forbearance agreement with Jack. You can give Jack the time he needs to sell the property or Jack can give you a Deed-in-Lieu of foreclosure. He will just sign the deed to the house over to you (you are now acting as the bank). You can then sell the property on the open market at full retail or sell to a local investor.
Either way you make money by combining a couple of techniques together.
When you are evaluating a note for purchase and you are working with the bank you still want to pull the homeowner’s credit report just so you understand all of their debts and the likelihood of any potential IRS problems attaching to the property before you complete your purchase.
DEFAULTED PAPER = HUGE RETURNS
As you will soon discover, there is a lot of defaulted paper out in the marketplace but no one knows what to do with it. You see, everyone only wants the good paper. Paper that is receiving a monthly payment every month without any problems. Where the payor (debtor) has perfect credit, a great job and lots of assets. All of the other investors are competing for the same deals.
Well guess what, defaulted paper has very little competition. We (that’s you) only want "bad" paper. We can pick and choose the very best of the bad paper to invest in. We can find properties where there is a ton of equity, yet because the homeowner is not making any payments on the mortgage, investors are not willing to buy the note from the note holder.
Most every single bank that you find treats defaulted paper as food poisoning. They don’t want it in their system and want to get rid of it as fast as possible. None of the banks, mortgage companies, and investors wants defaulted paper. Where does it go? To you and me.
Banks want to get rid of it because too much defaulted paper on a banks book can force the bank to close down so they must get rid of the bad paper. Finance companies and mortgages are only looking for the good paper to make a small rate of return.
Investors who own a mortgage where the debtor (homeowner) stopped making his payments do not know what to do with the defaulted mortgage. All the investor knows is that he is not getting his monthly payments. This leaves a huge viable opportunity for you and me to make a lot of money together.
Buy Real Estate at Huge Discounts
I guarantee that you will be able to purchase real estate at prices that make buying properties at foreclosure or the open market look like you are paying retail. For anyone that buys foreclosures, buying at 50 – 60 cents on the dollar is fairly commonplace. I am not arguing with this at all. I am simply saying that when you work on the defaulted paper side of the equation you are able to purchase property for literally pennies on the dollar.
You have a virtually endless supply of paper that you can purchase. There is even more of an opportunity when dealing with defaulted paper simply because most investors do not know what to do with the paper or how to profit from the defaulted paper.
What this means is that since so few people know how to purchase defaulted paper; you are able to get the very best discount on the paper you locate or buy. This equates to a very large return on our investment.